Cost of Capital and Project Risk

Cost of Capital and Project Risk

Order Description

1.Calculate the current weighted average cost of capital for CWC.
2.Calculate the appropriate discount rate for the healthy bottled water project.
3.Perform a sensitivity analysis for sales price, variable costs, fixed costs, and unit sales at +/- 10%, 20%, and 30% from the base case.
4.Perform an analysis of the following two scenarios:
Best case: Selling 2,500,000 units at a price of $1.24 each, with variable production costs of $0.22 per unit.
Worst case: Selling 950,000 units at a price of $1.32 per unit, with variable production costs of $0.27 per unit.
Explain if the firm should undertake the healthy bottled water project.

Cascade Water Company (CWC) currently has 30,000,000 shares of common stock outstanding that trade at a price of $42 per share.  CWC also has 500,000 bonds outstanding that currently trade at $923.38 each.  CWC has no preferred stock outstanding and has an equity beta of 2.639.  The risk-free rate is 3.5%, and the market is expected to return to 12.52%. The firm’s bonds have a 20 year life, a $1,000 par value, a 10% coupon rate and pay interest semi-annually.

CWC is considering adding to its product mix a “healthy” bottled water geared toward children.  The initial outlay for the project is expected to be $3,000,000, which will be depreciated using the straight-line method to a zero salvage value, and sales are expected to be 1,250,000 units per year at a price of $1.25 per unit.  Variable costs are estimated to be $0.24 per unit, and fixed costs of the project are estimated at $200,000 per year.  The project is expected to have a 3 year life and a terminal value (excluding the operating cash flows in year 3) of $500,000.  CWC has a 34% marginal tax rate.  For the purposes of this project, working capital effects will be ignored.  Bottled water targeted at children is expected to have different risk characteristics from the firm’s current products.  Therefore, CWC has decided to use the “pure play” approach to evaluate this project.  After researching the market, CWC managed to find two pure play firms.  The specifics for those two firms are:

Firm            Equity Beta    D/E    Tax Rate
Fruity Water        1.72        0.43    34%
Ladybug Drinks    1.84        o.35    36%

Order a unique copy of this paper
(550 words)

Approximate price: $22

Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency

Order your essay today and save 7% with the discount code DISSERT7